Until you differentiate between individual and societal time preference, (the education analogy applying only to the former), your assertions on this subject will continue to be less than persuasive. Also, risk may wash out in time series data, but if you’ve gone bust and/or lost your job in the meantime, the technicality will not put bread on the table.

I do try to keep the responses earnest, but going from an assertion about US data to Zimbabwe proved difficult to take seriously. Also btw, your assertion about the relationship between stocks and bonds runs counter to the basic tenets of the capital asset pricing model, the view of the investment community and academia, and for that matter, current events.

Majorajam,
sure, risks on equities are high in the short-run but as I said before, all these risks wash out in the very long-run if one bets on a world-spread.

John Q: Thanks. Your current position, that the data allow for a range of interpretations, is a very sensible one. That the range includes a few extremes on either side is as would be expected.

Don’t be silly. You asked my to show an example of a falling bond prices and a rising stcok market and I gave it to you, albeit an extreme example. There is really no correlation between bond pirces and stocks in terms of directional plays in modern economies.

John:

Tol’s behavior is fine. You’re just being supersenistive to being wrong and getting found out. Hey, we all make mistakes and I always admit to them if I’m wrong.

To be perfectly honest, I may not be the brightest spark that ever hit the universe, but I’m also not the dumbest. I read , re-read and read again your comment 44 and cannot make head or tail of it. It would be helpful if you could try to use less jargon next time so that mere plebs like moi are able to understand.

In sum to argue there is no time prefeence over a 100 year gap is to deny the obvious…. there is, huge amounts of it.

Let me suggest this. Tol seems to be serious about you going for a Nobel prize.
If you’re too shy about it send me all your stuff and I’ll present it as my work. We then split the fee (prize) 50/50….. Okay 60/40 if we score the jackpot. Don’t worry I’m great at making speeches in public so I won’t embarrass you any.

Then again you could go for it yourself and possiblly share the podium with ALgore when he gets his. I think you would scub up well in a tux anyway and if you really want I’ll come over to Stockholm to offer moral support.

As regards the conduct of the discussion, readers might wish to check James Farrell at #4 and then note the tenor of Richard Tol’s comments, such as #33.

I would assume the dearth of economists making arguments on this subject reflects the few number of immortals about from whom to glean data. Be that as it may, IMO, this remark is a cop out, even if it represents the consensus of the league of economists. Using an ‘empirical’ which is to say average prtp across time and space implicitly endorses the ethical ramifications of said, not least in the real world where people use bottom line summarys to make policy decisions (or, as is more often the case, justify policy decisions made).

To be honest, I’m not sure I follow. For many investors, notably ones with very short term liabilities like property and casualty insurers, banks, etc. equities are the ultimate in riskiness. When we talk about ‘global investors’, are we excepting these intermediaries? Pension funds that have little to no surplus might consider investing substantially in TIPS or index-linked bonds- is this decision unwise? I should also point out, default happens with equities just as it does with bonds- it just goes by another name: bankruptcy. What’s more, deflations are devastating of equities, while government bonds are largely immune (and actually benefit), while fraud and or Yukos style government malfeasance most often afflicts equity investment. The point is, or should be, that bonds exist because they are efficient for both buyer and seller in the real world, and not only for dupes. Equities may outperform in the majority of the historical record, but as history has a knack of pointing out, that record is incomplete.

JC,

Does that mean you are forecasting hyperinflation striking the US anytime soon? Btw, we have another example of the lack of correlation in stock and bond markets in post WWI Germany. In that case, the market was strong even in US dollar terms though it ended badly for shareholders circa 1945. All of which goes to show, never underestimate the ability of a pyramid scheme to look like an equity market even as the world falls apart around it.

Paul,

John Q is the only economist of name that I know who argues that the observed pure rate of time preference is near zero.

Most (but by no means all) economists that I talk to appreciate the ethical argument that the social pure rate of time preference should be zero or thereabouts, but they also tend to think that ethical arguments are largely irrelevant.

I’m just trying to get around the unhelpful jargon. It’s more meaningful in my view to think of the PRTP as the pure rate of societal myopia or impetuousness than ‘time preference’. In fact, I agree it is difficult to argue from empirical data that such a thing does not exist. This means that Stern’s choice of a PRTP of more or less zero left him exposed to reasonable criticism, (although, IMO, the critics who’ve picked up on this tend to be entirely unreasonable in their high-handedness; even one who, in an astonishing feat of cognitive dissonance, acquiesced to good arguments for Stern’s chosen parameter value in his published work prior to his professed outrage, i.e. he voted for it before he voted against it.). So, while, according to the rules of this game, I certainly don’t see how one could justify using an equity risk premium to discount climate change returns, I wouldn’t count myself as backing Stern’s formulation or anyone else’s for that matter. The only thing I can say with any semblance of conviction is that prohibitive values of the PRTP are paradoxical and that the degree with which economists take leave of these issues is farcical, (as are some of their other proclivities, e.g. unquestioning acceptance of financial return data).

But I take your point- to some degree, the climate change debate is a rhetorical inkblot. I also feel though there is plenty of room left over for the evidence to color or even overwhelm one’s preordained position. For my own prejudices, I’ll come clean: I believe that in spite of the abounding sea of data and analysis, there are only a tiny few pieces of information and conclusions that actually matter in this debate. The rest are white noise. The best example of the latter are estimates of the cost of climate change, even abstracting from the uncertainty in accounting for a distribution of temperature inputs, its interactions with cost drivers, with temperature inputs, with interactions, etc. etc. This to me is about as valuable as pinning a tail on a donkey, only far more counterproductive- imagine the donkey is set against an electrified fence- and, frankly, corresponding with Richard Tol in the blogosphere has only served to harden this prejudice. I believe further that this overwhelming uncertainty extends beyond the economics of climate change to the science as well but weakens substantially as it arrives.

Which brings me to the pertinent evidence: the climate is warming as a result of increased concentrations of Green House Gases. C02 is a greenhouse gas with a demonstrable effect on the climate, its concentrations have risen and are rising in an unprecedented fashion as are global temperatures in ways consistent with the postulated effect on climate of the increased concentration of C02. I think this much is indisputable and Occam’s razor requires reasonable people to conclude that this quacking waddling feathered thing with a flat beak and webbed feet is, indeed, a duck. This is a serious cause for concern as we are familiar with the tragic ramifications that can result from a changing climate without attributing a cause. That said, the largely uncontroversial, (outside the counterrevolutionary community), evidence required for this conclusion is insufficient to inform policy, so we’re stuck in the realm of the useless, i.e. economics. But there remains one other piece of evidence of a sort that points to a way out, not to mention, accounts for my position: the uncertainty itself (or my prejudicial interpretation of it). The uncertainty of climate sensitivity and feedbacks, of damages to the habitability of the only planet we have, even of discount rates and the utility of insurance. It is this uncertainty, (as Weitzman puts it, according to IPCC forecasts a two standard deviation event would imply more temperature change than currently separates us from past ice ages), together with the instinct to survive instinct that demands action, even if there exists absolutely no way of having any good estimate of the effect on utility of that action.

Perhaps all of that also means that Stern’s philosopher king amateurism was more enlightened than we know.

Really? Try Zimbabwe the last 12 months. Bonds are worth less than the paper their printed on and the stock market has risen about 1.2 million%. May not be sanguine, but on a relative basis a little more cheerful than holding bonds in that part of the world.

I agree that many terms are often used interchangeably and that, in order to further this debate here, it would be better to more clearly separate them. What we are interested in at the end of the day is whether we can improve time-preference-discounted utility.

There are two ways of looking at paying for climate change prevention:
1. by paying something with a loan that bears a certain real rate of interest to be paid back at the future date. Since the economy grows between now and the day we have to pay back the loan, the marginal utility of the reduction in future consumption is less than the marginal utility now of less consumption. Hence the ‘composite discount rate’ to be applied on the future loan pay-back is less than the pure rate of time-preference by a non-linear factor depending on risk-aversion (only by approximation will it be linear, but in such long time-frames this approximation is not very good). If you add other-regarding preferences to the mix (such as in Cambel and Cochrane) the issue becomes even tougher. This approach leads one to have to first find the pure rate of time preference, which consisted of the majority of my response. The ‘composite discount rate’ is much trickier.

2. We simply give up consumption now in order to prevent climate change in the future, with no loans involved. This is a more world-view because it recognises that loans have to come out of intended consumption by someone. Then the issue of discounting becomes much simpler: costs now are in dollars today and benefits are in utility-equivalents discounted by the Social rate of time preference.

Yes, we can argue about the social rate of time-preference versus personal rate of time-preference. We can potentially measure the personal rate, but the social rate is at the end of the day a social choice. Hence the relevant social rate is the consensus rate used for such wide projects by our chosen representatives and their departments, like the UK Treasury. Much, much, bigger than 0 (give or take minimal rounding).

Majorajam,
I fully agree with much of what you say about the complexities of investment behaviour, but they are largely irrelevant for my argument: when looking for the risk-free rate of return in the long-run relevant for global events, one tries to answer the question ‘what investment pattern could the world make to get the highest risk-free return in 2 centuries time’. My smilpe contentiion is that that wuold be to spread investments over global equities, which do not run the risk of government default (like the Russian Tran-Siberian bonds!) and whose large year-on-year risks average out to zero over the long run. Sure, there is still risk but the higher average returns dominate everything: the odds of average returns on the equity spread going below the bond return for one country becomes 1 in the long run if the only risks one allow for is government default and imperfectly correlated equity risks.

James,
I agree that many terms are often used interchangeably and that, in order to further this debate here, it would be better to more clearly separate them. What we are interested in at the end of the day is whether we can improve time-preference-discounted utility.
There are two ways of looking at paying for climate change prevention:
. by paying something with a loan that bears a certain real rate of interest to be paid back at the future date. Since the economy grows between now and the day we have to pay back the loan, the marginal utility of the reduction in future consumption may be less than the marginal utility now of less consumption.

I remain convinced that the technical arguments are, in this case, merely skirting fundamental ‘prejudices’. I remain hopeful that, if those prejudices were more clearly acknowledged, we would be much clearer on the technical positions adopted.

For example, in the case at hand, JQ and you clearly believe that JC and PF are overdiscounting and v-v. Primarily, this appears to me to be not a technical disagreement about the appropriate discount or time value for these purposes, but your different ideological/intellectual conceptions of discounting. Ie, I think you all understand discounting as technically achieving similar goals, but on different rationales, which underscore your respective opinions as to the appropriate rates.

Of course, perhaps I am wrong, and should leave the debate to those who actually understand the technical stuff sufficiently :)

on the utility discount rate, I just reiterate my position: if John Quiggin can provide empirical evidence for his outrageous claim, I will nominate him for the Nobel Prize — I am sure he has not, and I don’t think he ever will, but I always like to be surprised

The PRTP discounts utility. It’s being non-negative or zero implies that all that great stuff 100 years from now is worth less than the same great stuff would be to the current set of air breathers. In other words, there is a hole in the hole you speak of and it’s opaque.

Patrick,

Fair enough. I did say what I meant, given that both usages are in the lexicon, but admit to forgetting that amongst educated types how they got there matters. Not to mention, the sentence isn’t very well written.

This debate is indeed not about economics, but rather a never ending string paradoxes- we should have no problem adapting to climate change, but adapting to life with less fossil fuel is a bridge too far. Society can be myopic and by consequence act in ways not always consistent with its long-term betterment. Because of that ‘revealed preference’, the hurdle on public works projects that benefit society in the long-term ought to be so high that they not be undertaken. The list goes on. In my view, the optimists in this debate are on the side of action, so I don’t agree with your framing of the issues.

Horse for courses. I will behave exactly as the comments policy demands. Get over it and don’t hold grudges. You shouldn’t hold grudges from one site to another as it’s bad form. I always wear my tux here anyways. Look and see how well behaved I am here. I even amaze myself. Think of it as a Jeckell and hide personality disorder and try and deal with it.

By the way it’s not as though i have been on the receiving end too you know.

Yes, and Stern’s argument (broadly speaking) is that this improvement is the only significant consideration in choosing a discount rate. There shouldn’t be an addition of some extra percentage points reflecting the fact that we are (broadly speaking) impatient.

Majorjam, it was a forlorn hope as far as I a, concerned. I am a pretty literal person, though, so don’t take it personally. I am glad you meant it that way, but I do wish you could have simply said what you meant :)

I think we’ve all implicitly agreed to call 0.1 percent zero. As for Paul’s error, that’s what I was trying to say in my second paragraph (though I think these are tricky issues, and I’m not an expert). However, my point in quoting that sentence is that I wish Paul had said PRTP, not ‘discount rate’, which only confuses people.

Maybe you would like to explain to us mortals why… let’s use and example….

Why the present model car you wish to purchase this weekend has equal vlaue to you than a car that is four model cyles away. You’re valuing them with equal weighting aren’t you under your thesis if time your preference is zero.

Maybe I’m wrong but I would be interestd to see your answer. it would be great if you could refer to this example so others understand.

I’ve seen the professors argument and he tries to get around this by arguing that each generation should be separated from the others in a sort of way. I think i’m right here. However the hole in the argument is that earlier generations are actually going to spend the money to make life far more comfortable for later generations (100 years for now) who will be much wealthier than we are both from a monetary perspective and acceleration of technological change.